Both equities and bonds have continued to do well this year. Although U.S. - China trade tensions have weighed on equities in recent days, investors in both local and global equities are still well ahead for the year to date, while investors in domestic and international bonds have also benefited from the capital gains created by largely unexpected falls in bond yields. Bond proxies like property and infrastructure have also fared well. Looking ahead, the global business cycle still looks intact, though 2019 is shaping up to be a bit weaker than 2018. The major risk is geopolitical and hard to call: Nobody can be sure of the outcome of the U.S. - China trade talks, and the impact could be significant (on the upside and the downside). Standard portfolio protection tactics look advisable (diversification, bond insurance, defensive tilts). At home, the business cycle has weakened – the Reserve Bank has responded with an interest-rate cut – and although the economy is still growing, listed New Zealand companies are likely to find it harder going to grow their profitability.
New Zealand Cash & Fixed Interest
The Reserve Bank of New Zealand cut the official cash rate, or OCR, by 0.25% to 1.5%, an all-time low, at its monetary policy statement on 8 May. Short-term interest rates are correspondingly lower, with the 90-day bank bill yield now 1.7%, down from just under 2.0% at the start of this year. Long-term interest rates have also reached new lows, with the 10-year government-bond yield now only 1.8%. The New Zealand dollar has weakened and is down 1.5% both in overall trade-weighted value and in terms of its headline rate against the U.S. dollar.
A majority of forecasters had expected the RBNZ to cut the OCR: Slower domestic growth had meant that inflation was likely to take longer to reach the bank’s 2% target, so the economy needed some extra monetary policy boost. Even after this cut, the bank expects that it will be mid-2021 before inflation will be clearly at 2.0% or more, and current market thinking is that the RBNZ may well have to do more, with the futures market leaning towards the idea of another 0.25% cut in the pipeline. Savers will be receiving very low levels of bank deposit income for some considerable time to come.
Property & Infrastructure
Lower bond yields globally and locally have enhanced the attractiveness of income-oriented equities in general, and local listed property has been one of the beneficiaries. Year to date the S&P / NZX All Real Estate index has recorded a capital gain of 10.4%, and a total return including dividends of 11.4%.
The search for yield has also helped the A-REITs, which for the year to date are up 10.6% in capital value and have delivered a total return including dividends of 11.4%, a little behind the 13.3% total return from the wider sharemarket.
Overseas property shares have also done well. For the year to date, the FTSE EPRA / NAREIT Global Index is up 13.3% in terms of net return in U.S. dollars.
The S&P Global Infrastructure index in U.S. dollars has delivered a 13.7% net return (including the value of taxed dividends) for the year to date, almost identical to the 13.8% net return from the MSCI World Index of the broader global equity market. Hedging back into New Zealand dollars boosted the return slightly, to 14.1%.
The May headwinds for global shares, linked to rising fears of a poor result from the U.S. - China trade talks, have had relatively little impact on the New Zealand sharemarket, with the S&P / NZX 50 Index reaching new highs in recent days. For the year to date, the S&P / NZX50 Index has gained 13.3% in capital value and has recorded a total return of 14.6% including dividend income.
The global backdrop has had more of an impact on Australian shares, which have drifted down from their recent peak on 26 April. The past weeks’ declines have been modest, however, set against the scale of the gains earlier this year, and the S&P / ASX200 Index is up 11.8% in capital value and up 13.3% including the value of the dividend yield.
The latest data continue to suggest that the economy is growing more slowly than previously.
International Fixed Interest
Bond yields everywhere have continued to fall.
Up to early May, world shares had continued their recovery from the sell-off of late 2018. At that point, however, cautious optimism about the outcome of the U.S. - China trade talks turned bearish after anti-China tweets from President Trump were followed by higher tariffs on a range of Chinese exports and by Chinese retaliation with new tariffs of their own. Despite this recent setback, the strong gains earlier in the year mean that year-to-date returns remain substantial. The MSCI World index of developed markets is up 12.9% in U.S. dollars.
With the U.S. economy continuing to do well, the S&P 500 is up 14.9% and the Nasdaq Composite is up 19.3%. European shares, although also well into positive territory for the year, have not quite matched the American markets, with the FTSE Eurofirst300 Index up 11.3%. The U.K., despite its Brexit problems, is also ahead, with the FTSE 100 Index up 7.1%, while Japanese shares have been least strong, with a 6.6% gain for the Nikkei index.
Emerging markets have also done well, with the MSCI Emerging Markets Index up 7.0% in U.S. dollars and the core BRIC economies (Brazil, Russia, India, China) up 10.2%.
While the recent share-price rises have been impressive and welcome, it is worth noting for perspective that they have not quite regained all the ground lost in late 2018. In U.S. dollars, the MSCI World is still 3.3% below its peak (21 Sept last year).
The outlook remains for ongoing growth at a reasonable, though not strong, rate this year and next, with pronounced regional variations and considerable geopolitical uncertainty.
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